Legal struggle heats up over Equinox Int’l advertising

David Strow

Wednesday, Nov. 24, 1999 | 10:52 a.m.

Equinox International Corp. of Las Vegas is denying government allegations that it is violating a federal judge's restrictions on advertising, saying it is vigilantly monitoring its representatives' activities to make sure they're in compliance.

But that isn't placating the states of Michigan, Virginia and Tennessee, which have joined in the legal attack on Equinox, branding it an illegal pyramid scheme that violates state laws. Eight states, including Nevada, are now pursuing legal claims against the company in Las Vegas federal court.

The big network marketing company says it has 32,000 independent distributors in the United States selling items like health and beauty products.

It is currently operating under a federal injunction that restricts its advertising and recruitment methods. In a Nov. 2 filing, the Federal Trade Commission and the state of Nevada accused Equinox of violating that order, citing three specific examples that occurred in October in Maryland and North Carolina.

The government officials are using these alleged violations as grounds to request a significant tightening of the restrictions Equinox must operate under.

But Equinox says it's done nothing wrong, and has disciplined the distributors who committed the violations. It also accused investigators in the two states of attempting to set up distributors to commit violations.

"Of plaintiffs' multiple agents dispatched across at least six states, plaintiffs are able to allege only a single, solitary example of a prohibited income claim made by a distributor after the (Sept. 14) order," Equinox said in its filing, dated Nov. 12. "Of the over 32,000 independent distributors and 139 training centers throughout the United States, plaintiffs' strongest support is from a (Maryland) student intern, clearly instructed to search for violations, who was twice (at least) rebuffed in his attempt to gain information from independent distributors inconsistent with the mandate of the order."

Under the injunction, entered by federal Judge Johnnie Rawlinson, Equinox and its distributors are prohibited from making any claim to recruits regarding potential income associated with a company distributorship. The company is also only permitted to use advertisements that have been approved by court-appointed receiver Robb Evans.

The disputed cases in Maryland involved the investigative activities of Benjamin Hinceman, a law clerk with the Maryland Securities Commissioner's office.

In one case, Hinceman responded to a classified ad from an Equinox distributor in Baltimore that was not approved by Evans.

In a separate case, Hinceman said he was told by Equinox distributor Mark Dardozzi that he had made $2,600 in his first month with the company, and a person further up in the organization was making $40,000 a month. This directly violates Rawlinson's order.

Equinox did not dispute the substance of either claim, but said it did not condone the activities, and had created a department within the company specifically to keep tabs on distributor ads.

In the case of the Baltimore advertisement, placed by Pennsylvania distributor Susan Pryor, Equinox sent a certified letter to Pryor ordering her to pull the advertisement immediately. The letter was dated Nov. 2 -- the same day the complaint citing the ad was filed in federal court.

In the second case, Equinox claims Hinceman asked the distributor three times for income projections before the distributor complied.

"We understand your position that you were bated and made statements regarding income to the investigator only after repeated attempts by the undercover investigator to get you to disclose such information," Equinox wrote Dardozzi Nov. 11. "However, Equinox has and will aggressively enforce this policy."

Equinox placed Dardozzi on six-month probation, and informed him that a similar violation would result in his termination.

In a third case cited by government officials, M.C. Glenn Aldridge, an investigator with the North Carolina attorney general's office, claimed she was not presented with court-ordered disclosures, nor was she informed about the changes to Equinox policy required by Rawlinson during an undercover meeting with a Raleigh distributor. Each disclosure must be individually read and initialed by a recruit before their application can be processed.

In its response, Equinox accused Aldridge of telling a "deceptive" story. The investigator used an alias, Raleigh distributor Keith Terry claimed, and began filling out the form outside of the presence of the recruiter. The investigator was in a hurry to leave, the Equinox distributor said, and didn't complete the application. A follow-up appointment to finish the application process was not kept.

"In short, (the investigator) never became an Equinox distributor -- it would have been impossible for her to do so without signing and individually initialing the terms and supplemental terms," Equinox said. "Although (the investigator) went to great lengths to attempt to manufacture a violation by signing an (incomplete) application ... no violation of the order occurred."

Government officials want Rawlinson to tighten restrictions against Equinox. Specifically, they want Equinox to rework court-ordered disclosures into a three-line disclosure statement, and require Equinox recruiters to verbally state the disclosures to new recruits. Currently, the government claims, Equinox is burying the necessary disclosures in confusing, hard-to-read pages of legal language.

But Equinox says the government is asking too much -- and is violating the company's First Amendment rights. At this point, the company claims it's undertaken "Herculean efforts" to comply with existing orders.

"The order delineated eight specific changes to be make to Equinox's procedures and practices," Equinox said. "Defendants could not adequately or accurately address those changes in less than one-half line of text each.

"These hoops are so burdensome that they are likely to drive Equinox distributors to competitors. Plaintiffs would have each independent distributor recite in pledge-of-allegiance-like fashion the changes contained in the order."

Rawlinson is set to begin hearings on the government's motion Dec. 2.

Meanwhile, a new complaint filed in federal court Nov. 19 added the states of Virginia, Tennessee and Michigan to the list of plaintiffs aligned against Equinox. Virginia said it decided to join the case after the company "failed to adequately explain that no violations have occurred" in response to a written request by the Virginia attorney general.

Tennessee raised the most explosive new allegations in its complaint. According to the Tennessee attorney general's office, Tennessee consumers have had unauthorized charges placed on their credit cards by Equinox representatives. In some cases, Tennessee claims, representatives would use others' cards to make purchases in order to meet sales quotas.

Maryland also updated its complaint against Equinox, charging it with violating Maryland securities laws. Maryland argues that an Equinox distributorship should be considered a "security," and thus, Equinox representatives should register with the Maryland Securities Commissioner.

The Equinox opportunity, Maryland claimed, "is an inherently risky investment opportunity that is illegal under Maryland law."

Meanwhile, South Carolina said in the Friday filing that it was withdrawing from the case, without elaborating. Officials in the South Carolina Attorney General's office could not be reached for comment.